Banking Reform Unlikely To Substantially Bolster Private Consumption In Short Term
BMI View : We believe Guatemala's recently passed banking reforms could help to strengthen the financial sector's weak regulatory framework, bolstering domestic and foreign confidence in the country's financial institutions. However, in the short term the impact on Guatemala's domestic demand story is likely to be modest at best given the still-limited access to banking services by the country's lower and middle income brackets.
After numerous delays, Guatemala's congress approved a long-awaited amendment to the country's 2002 banking law in late August. We believe this reform could serve as an important step in improving the financial sector's weak legal framework - a continued concern given the sector's highly concentrated nature and past history of crisis. That said, in order to substantially bolster Guatemala's weak private consumption in the near term - something we have long highlighted as an obstacle to stronger growth - we believe more needs to be done to ensure greater access to loans by the country's lower-and-middle income brackets.
Guatemala's banking sector has historically been fairly weak, with limited legislation governing offshore banking (representing just over one-tenth of the sector), an ineffectual regulator, and substantial red-tape deterring foreign banks from setting up shop in the country. Indeed, the lack of effective risk protections have previously seen two major banks forced to suspend operations over the last decade, with one struggling to support its faltering offshore arm after a series of risky investments, and the other faced with massive fraud perpetrated by one of its branches. Since then, with the banking sector having become significantly more concentrated ( see chart below), we believe this situation has become even more precarious, as a crisis at one of the larger banks could have even greater ramifications for the entire sector.
|Sector Has Grown Far More Concentrated|
|Guatemala - Herfindahl-Hirschman Index|